A financial BLOG written by a DIY investor covering Singapore blue chips, dividend stocks, financial education, corporate news, money saving tips, book reviews and my journey to financial freedom. Currently managing a personal portfolio of more than SGD $1,000,000, I aspire to have an average cash flow of minimum $10,000 per month either through realised capital gains or dividends.

Saturday, June 7, 2014

My unit trust portfolio

Throughout my
investment journey I learned the importance of diversification and dividend
investing. Diversification hedges against single stock/bonds mishap and over
confidence in one company; dividend provides the psycological consolation of
recurring income from my investments.

Last year after much deliberation, I
liquidated part of my stocks portfolio and purchased unit trust in order to
diversify the systemic risk. I still hold a good number of blue chips like DBS,
SGX CAMBRIDGE, OUE, Semb Corp Industries but I decided that no matter how
diversified I am in local stocks, I am subjected to political and country
risks. If one day the PAP is ousted from power, our stock market may take a
severe beating.

Last year, I pledged my stocks for a credit line with my then
bank at 1.05% interest. Hence the unit trust you see below are partially funded
by cash, ie 300k and partially borrowed.

I chose dividend
payout for all my funds (with exception of USD bond funds) as I usually
reinvest them at my discretion when markets are down. The markets are in a
staggered uptrend mode. By opting for dividend payout in cash instead of
reinvestments, I am forcing the fund managers to take profit on a monthly basis
for me. There is no point for me to reinvest and keep buying higher.

After 1 year, the
total dividends I have received is approximately $30,000. The capital loss on
my funds works out to be 9,900. Hence the net return is 3.2%. Moreover, I
incurred a interest cost of about $3150. Hence the return works out to be
2.76%. However, if you calculate base on my initial capital of $300,000, my leveraged
yield works out to be 5.65%, if I liquidate everything on Monday.

At current market,
I intend to hold the unit trust portfolio for the long term, possibly till
retirement. The whole purpose to construct a leveraged unit trust portfolio is
to lock in the contract for low interest rates (1.05%) and use the dividends to
repay the loan. Technically, the loan can be repaid in about 10 years time
assuming dividends remain constant. I can repay the loan anytime if I sell off
my stocks anyway.

I still have about
$300,000 “debt headroom” to draw down and capitalise on any market opportunity
that may appear. Eg, the stock market crash 20%, I can utilise $100,000 to pick
up deeply discounted stocks at low interest rates while waiting for recovery,
the dividend yield will be able to pay for the interest accured.

Is it possible to
replicate this strategy? Yes and no. I bought most of the unit trust from
fundsupermart and transferred to the bank I was previously working. The
interest rate was granted at staff rate and if you walk in to any bank for such
service, be prepared for at least 1.6% loan rates and 2% sales charge.

The good thing
about buying unit trust for dividend is the payment is usually prompt and gains
are not taxable. This serves as good income if I am out of job but if I am
gainfully employed, the dividends will pay for the loan and interest while
buffing up my credit limit to draw down in the event there is a market crisis.
I will opt for dividends reinvestment scheme if any unit trust fall below 10%
from my initial purchase price.

At low interest
rates environment which in my view will continue for several years, borrowing
money to spend/invest is the best way to hedge against zero interest rates
environment.

My investment
portfolio has grown significantly from the leverage. Including CPF and SRS
funds, I have about 1M invested already. My cash stock dividends and trading
gains works out to be about $20,000 a year which in totality brings me $4,000
passive income a month. I will work towards a 5 figure passive income in order
to have a more comfortable life ahead. Still slightly away from the 50% mark, I
shall persevere.

Singapore Blue Chips

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About Me

I am an ordinary Singaporean guy in my early thirties who is passionate about investing since 2003.
I live in a 4 room HDB flat and like many Singaporeans, dream of becoming a millionaire.
Currently I am an ordinary worker and have just completed my Masters. I aspire to build up a portfolio of 1 million dollars and derive a yearly recurring dividend income of 6% by 35.
The only way to achieve this aim is to work hard and invest prudently.
I invest in a variety of instruments such as unit trusts, stocks, REITS and foreign currencies mainly Australian dollars options.